So . . . we all deal with prices all the time. It's usually one of the first things we look at when evaluating purchases, it's how we judge the quality of a lot of items, and it's believed to be the primary usage that most of us have for math. It's also the basis for a lot of my academic research and a topic I find profoundly interesting. And yet most people don't really understand how prices are set, why they are at the level they are, and what a "fair" price is. A couple of anecdotes about pricing after the jump.
A person I know is currently going through the process of buying a house. As any of you who have done this before knows, it is an exciting yet stressful time, with lots of information to consider and decisions to make. Because everyone involved takes it so seriously and has a high degree of personal involvement, optimal decision-making often goes out the window.
Anyway, this person found a house that was up to standard, basically had everything desired (though it needed some work), and was in a good location. The only problem was the price - too high (of course too high; if it was too low it wouldn't be a problem, would it?). There was some inside information, though (provided by the seller's agent, which becomes more interesting as you read on), that the sellers had already bought a new house and were carrying two mortgages. They would be eager to sell and therefore a lower offer could be made.
The protagonist of the story made such an offer, and it was soundly rejected with no counter-offer. This is somewhat rare, and reserved for those cases where one party believes the other party to be jerks and doesn't want to deal with them. The reason? The offer was too low for what the seller wanted. Never mind that they were carrying two mortgages. Never mind that the house had been on the market for the better part of a year with no takers (and now no prospects). The sellers had put work into the house, dammit, and they wanted their target price number.
There's your example of less-than-optimal decision-making.
It doesn't matter what price the seller had in mind, or how much time (or effort, or love) they had poured into the house; the price was too high for the market. Of course the seller's agent is going to do everything possible to move the property, because the agent wants it off his or her books. We run into this in lots of circumstances as buyers (though rarely where we set the price). That price is too hight! unfair! gouging! profiteering! etc.! Well, if everyone felt that way, then the seller would go out of business. If you need something (or believe you need something - do you really need that third pair of orange leather pants?) enough that you're going to buy the product, it's not gouging. No one is holding a gun to your head forcing you to buy. And in this example, no one is forcing the seller to sell (until the bank does by foreclosing on two properties at once, or as it's also known, the Gibson).
Pricing isn't personal - it's business. Don't complain that companies are out to get all your money - they are, but that's their role. Your role is to decide whether you give them all of your money or not.
I often tell my students about a piece of art that my wife and I bought as a gift while travelling. They seller initially quoted us 160 euros, and through walking away, bargaining, walking away, being followed, being pestered, bargaining, and finally settling, we bought it for 35 euros. My wife was concerned that we had been taken advantage of and that he could have gone lower. Maybe so (probably so - if he agreed to the deal, he made a profit), but we were okay with the price. We accepted it. Therefore it was fair enough to us.
I encountered the same thing bargaining to buy things in China; you fight, and curse, and get yelled at, and then you settle on a price and the first thing the shopkeepers ask is if there's anything else you want so that you can start the process again and really get a great price for that knock-off Hello Kitty hoodie.
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